Things Your Parents Didn’t Tell You About Taking Care of Your Home: Property Taxes
No one enjoys paying taxes, but property taxes are a reality in all states and are typically an important part of a local economy’s plan to fund their public schools, emergency responders, and other city services. It’s important when making a decision about purchasing a home to take into account all the ongoing costs that you’ll face to keep and maintain the home over time, including utilities, homeowner association fees, repairs, and, yes, property taxes. These costs can add up over time and may make a good deal in the short-run evolve into a costly choice in the long-run.
Property taxes are typically not as confusing as most taxes. Fortunately, in most jurisdictions property taxes are calculated by local officials, not by the person paying them, and are set and known each year well in advance of their due date. Unfortunately, having local officials calculate the taxes may make the process a lot less clear and can open the door to miscalculations.
The property tax is charged to the owner of a property, not to renters. However, renters can end up paying a property tax indirectly, since high property taxes can drive up rent.
A property tax is almost always applied to real estate, and sometimes to other specific categories of personal property used by businesses. Taxes on cars are sometimes included under the property tax category. The real estate taxed includes land, buildings, and permanent fixtures or improvements. Properties owned by educational, religious, and charitable organizations are usually exempt from property taxes. Some jurisdictions also offer exemptions or subsidy programs for veterans, senior citizens, and the disabled. Some jurisdictions also exempt certain types of property or have reduced rates for them, usually for properties like farms, ranches, cemeteries, and conservation parks. Take some time to research your area’s rules regarding exemptions to property taxes for different properties, particularly if purchasing land or buildings that might have a dual usage. You can usually contact your municipality or county board for further clarification.
Property taxes are administered on the local level, and as such they can vary widely from place to place. The taxes administers by overlapping jurisdictions are added to determine the total tax rate. Local jurisdictions that can levy property taxes include but are not limited to school districts, cities, and counties. Some states have rules governing how jurisdictions can apply property tax, including what they can charge for, and some states set a cap on the tax rate, or a cap on the amount taxed.
The jurisdictions that most commonly charge property taxes are the county, the city, and the school district. Some areas divide jurisdictions differently, or allow different jurisdictions to levy a property tax.
Property taxes usually then go towards local amenities, especially schools, emergency services (like the police and firefighters), transportation, libraries, and parks. While taxes are unpleasant, areas with higher property taxes may get to enjoy better services from their city, which can be an important point in considering different places to live.
How Real Estate Property Taxes Are Calculated
So you don’t have to do all the math yourself to see if you’re being overcharged, many states and local jurisdictions offer property tax calculators.
Property taxes are typically calculated through the mill levy (or millage tax, or millage rate), the assessment rate (or assessment ratio), and the assessed property value. The mill levy is the tax rate for your property. One mill is one tenth (1/10) of a cent, so for every $1,000 of assessed property value, each mill would be worth $1. Alternatively, you can view each mill as a tenth of a percent, so 10 mill would give a 1% tax rate. All of the tax rates for the overlapping jurisdictions you’re in are added together to get the total tax rate.
After determining the market value of your property, the assessor will multiply that by an assessment rate. The assessment rate is a fixed percent at or under 100%, and varies widely across the country. The market value is multiplied by the assessment rate to get the assessed value, which is then multiplied by the mill levy to get the amount of taxes you’d be paying. The assessment rate is usually easier to change than the mill levy, so is more likely to be raised. Not all states and jurisdictions use an assessment rate.
Some places will just give your effective tax rate, which is the total percent you’d be paying in taxes. The effective tax rate is generally what’s given when states and local jurisdictions are ranked by their property tax rate. So if your area’s assessment rate is 10%, and the mill levy is 50 mill (or 5%), the effective tax rate would be 0.5%. (The effective tax rate doesn’t usually take into account exemptions).
Be aware that some jurisdictions apply higher mill levies for non-primary residences, so if you own more than one home or business, you can get hit by higher rates. Mill levies are also sometimes different for different property types, so an industrial business property, a homestead, a commercial business property, a rental property, and a primary residence might all have different millage rates even if they’re in the same jurisdictions.
The value of your property is assessed yearly, usually at the beginning of the year, but sometimes on different dates depending on location. Exemptions usually reduce the assessed value of your property, though they can be applied before or after the property value is multiplied by the assessment rate. Some exemptions reduce assessed property value by a flat rate or by a flat amount, while some change the way that property value is calculated.
There are three main ways property values can be assessed:
- The Sales Evaluation Method
This method is based on an estimate of how much your home would sell for. Usually this is based on how much similar homes in the area have sold for and the state of your home.
- The Cost Method
This method is based on an estimate of how much it would cost to replace your home if it was destroyed. This is fairly easy to calculate if the property’s newly built. Usually, the cost is based on an empty house, so prices of appliances and other contents don’t drive cost up.
- The Income Method
This method is based on how much you could theoretically make from renting the property out.
For instance, let’s say you own a condo in Metropolis City, in Example County. You’re zoned for Metropolis High School. The Metropolis School District levies a property tax of four mills on all properties zoned for it. Metropolis City levies a property tax of twenty mills. Example County levies a property tax of twenty-six mills. You’d end up paying a total property tax of fifty mills, or 5% of your property value. Metropolis City has an assessment rate of 30%. So if your condo’s market value is $600,000, the assessed value will be $180,000, and you end up paying $9,000 every year in property taxes. Your effective tax rate is 1.5%.
In another example, let’s say you have a farm outside of Farm Town in Rural County, and you’re zoned for Rural County High. Rural County High levies a property tax of five mills, and Farm Town levies a property tax of eleven mills. Rural County levies a property tax of fourteen mills. Your total property tax would be thirty mills, or 3% of your assessed property value. Now, Rural County wants to discourage urban sprawl, so they’ve got exemptions in place so that farms are only assessed for land value, not the value of improvements and buildings. Your land is worth $60,000 just on its own. The assessment rate is 25%, so your assessed value is $15,000. With a tax rate of 3%, you end up paying $450 every year in property taxes. Including exemptions, your effective tax rate is just 0.75%.
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